In late March 2011, the IRS issued Rev. Proc. 2011-26 as guidance on recent legislative changes to the bonus depreciation deduction. See
The legislative changes had retroactively, first, extended the bonus deduction to apply to property placed in service in calendar year 2010 and, second, allowed a 100% bonus deduction for property acquired and placed in service after September 8, 2010.
The following discussion describes some rules in Rev. Proc. 2011-26 that apply to certain taxpayers that placed property in service in 2010 and filed returns that may not be in conformity with the new, retroactive rules, and to certain taxpayers that do not want the 100% bonus depreciation deduction on post-September 8, 2010 property.
This discussion also addresses what steps a taxpayer may take if it filed a return claiming 100% bonus depreciation on property that, under Rev. Proc. 2011-26, is not eligible for a 100% deduction.
For an electronic version of the revenue procedure:
Rev. Proc. 2011-26
Legislation enacted in September 2010 included an extension of the prior law 50% bonus deduction, allowing the bonus on qualified property placed in service in calendar year 2010.
Legislation enacted in December 2010 further extended the bonus deduction to qualified property that is placed in service in calendar years 2011 and 2012. The December 2010 legislation also provided that, for qualified property acquired and placed in service after September 8, 2010, and through the end of calendar year 2011, the bonus depreciation deduction is 100% of the basis of the qualified property—rather than 50%.
Some taxpayers filed tax returns for fiscal years, or short tax years, ending in 2010 without taking into account the bonus on their calendar year 2010 qualified property, and are now in the position of having not taken the full amount of depreciation allowable on that property.
Generally, a taxpayer is allowed to make an election not to take bonus depreciation on any (or all) classes of property that it places in service in a tax year (an “election out”). Thus, for example, a taxpayer could elect out of the bonus deduction on all of its 5-year MACRS property while taking the bonus on its 7-year property. This election is required to be made with the timely filed tax return (including extensions) for the year the qualified property is placed in service, by attaching a statement to the tax return identifying the classes of property to which the election applies.
Rev. Proc. 2011-26 notes that the election applies to all property in a class placed in service in the tax year. The legislation extending the bonus deduction to 2010 property did not provide any special rules for fiscal year taxpayers. A taxpayer that filed a return for a fiscal year ending in 2010 was not provided an election to forego the bonus depreciation on its 2010 qualified property while taking the deduction on its 2009 property. Also, a fiscal year taxpayer that made a timely election out of the bonus on its 2009 qualified property would, under the general rules, thereby also have elected out of the bonus on its 2010 qualified property—even if the taxpayer was unaware at the time it filed the return that there would be a bonus depreciation deduction allowed on its 2010 property.
If a taxpayer does not deduct the depreciation, including bonus depreciation, allowable on its property, the basis of the property is still reduced by that “allowable” depreciation amount, which could affect the amount of gain or loss recognized on a later disposition. If an election out of the bonus depreciation is not in effect, the property’s basis would still be reduced. There are general procedures to correct these omissions, but the retroactive bonus depreciation legislation in 2010 presented some issues, which Rev. Proc. 2011-26 attempts to address.
Available Procedures for Missed Bonus Depreciation in Certain 2010 Tax Years
Rev. Proc. 2011-26 allows a taxpayer with a fiscal year ending in 2010, or a taxpayer with a tax year beginning and ending in 2010, the following options:
- If bonus depreciation was not claimed on the return for some or all qualified property, and an election out of bonus was not made for that property, the taxpayer can claim the additional bonus deduction either by:
Filing an amended return before filing the return for the next tax year, or
Making an automatic accounting method on a Form 3115 filed with the return for one of the next two tax years, which would claim any under-depreciation as a section 481(a) negative adjustment for that tax year. (To use this procedure, the taxpayer must still own the property at the beginning of the tax year for which the Form 3115 is filed.)
For example, if a taxpayer with a March 31, 2010 tax year did not claim bonus depreciation on its 2010 qualified property, and had not elected out of bonus for that class of property, it could file an amended return claiming the additional depreciation, before filing its March 31, 2011 tax return, or could file a Form 3115 claiming the missed depreciation on its return for either March 31, 2011, or March 31, 2012.
- If bonus depreciation was not claimed for any qualified property in a class (either for 2009 qualified property or 2010 qualified property), and an election out of bonus was not made for that property, and the taxpayer did claim some depreciation on such property, the taxpayer will be deemed to have made an election out of bonus for that class of property for that tax year if it does not use the procedures described immediately above, in the prescribed time.
For example, if a taxpayer with a March 31, 2010 tax year did not claim bonus depreciation on any of its 5-year property (whether placed in service in 2009 or in 2010), it would be deemed to have elected out of the bonus on its 5-year property for the March 31, 2010 year, if it does not file an amended return or a Form 3115 as described above.
The option does not apply if the taxpayer claimed bonus depreciation on its 2009 qualified property but did not claim it on its 2010 qualified property in that same class placed in service the same tax year. While this is a deemed election, it still applies to all property in the class placed in service in that tax year.
Generally, a taxpayer that has not claimed a deduction for depreciation (including bonus depreciation) is allowed to correct that omission by filing an automatic accounting method change (under Section 6.01 of the Appendix to Rev. Proc. 2011-14) for any tax year in which it still holds the property at the beginning of the year. Rev. Proc. 2011-26 limits the ability to do so to two tax years following the omission, for these 2010 fiscal year and short-year taxpayers, when there was no bonus depreciation claimed on any property in a class on the timely filed return.
- A taxpayer that made an election out of bonus depreciation for one or more classes of property on its timely filed return can revoke that election. The revocation is accomplished by filing an amended return claiming the correct amount of bonus depreciation for that class of property (on both the 2009 and the 2010 qualified property). The amended return must be filed before the taxpayer files its tax return for the following tax year or, if later, by June 17, 2011.
For example, a corporate taxpayer elected on its March 31, 2010 tax return not to take bonus depreciation on its 5-year property. It can revoke that election by filing an amended return claiming the bonus depreciation deduction on its 5-year qualified property placed in service in that tax year, both in 2009 and 2010. This amended return would generally need to be made before filing the return for the March 31, 2011 tax year (which for a corporation would generally be due by June 15, 2011, unless an extension to December 15, 2011, is secured), but the taxpayer would in any case have until June 17, 2011.
Election to Take a 50% Bonus Deduction Instead of a 100% Bonus Deduction
A taxpayer that has a tax year that straddles September 9, 2010, may have some qualified property eligible for a 50% bonus deduction and some qualified property eligible for a 100% bonus deduction. It could, under the general rules, elect out of the bonus depreciation on any class of property (the election would apply to all property in a class for that tax year).
Rev. Proc. 2011-26 allows a taxpayer to elect to take only 50% bonus depreciation on all property in any class that is placed in service in a tax year that includes September 9, 2010.
The election to apply 50% bonus to post-September 8, 2010 qualified property is made by attaching a statement to the timely filed return for the tax year (including extensions) identifying the classes of property to which the election applies. A taxpayer that has timely filed its tax return for that tax year on or before April 18, 2011, is allowed until six months from the
original due date of the return to make the election, apparently by filing an amended (or superseding) return for that year with the election.
The revenue procedure notes that this election cannot be made if there is an election out of bonus depreciation in effect on that class of property; however, a taxpayer with a fiscal year ending in 2010 (on or after September 9, 2010) or a short tax year beginning in 2010 and ending on or after September 9, 2010, could elect to revoke an earlier election out of the bonus, as described above.
For a corporation that had a tax year ended September 30, 2010, and that timely filed its return by April 18, 2011, the election to take a 50% bonus depreciation deduction on its post-September 8, 2010 qualified property will be due June 15, 2011.
Correcting an Erroneous Claim of a 100% Bonus Depreciation Deduction
As previously discussed in
TaxNewsFlash 2011-152, there had been uncertainty about the requirements for the 100% bonus depreciation.
Rev. Proc. 2011-26 requires that, to be eligible for the 100% bonus depreciation, the qualified property must have been acquired after September 8, 2010, and explains that, to meet this requirement, generally the cost of qualified property must have been paid for (for a cash-method taxpayer) or incurred (for an accrual-method taxpayer) on or after September 9, 2010.
For qualified property that is considered self-constructed by the taxpayer for its own use, the acquisition requirement is satisfied if construction of the property did not begin before September 9, 2010. Special rules may allow a 100% deduction on “components” of a larger property that is itself eligible only for a 50% bonus deduction, if the components satisfy the September 9, 2010 acquisition requirement.
A taxpayer that filed a return claiming a 100% bonus depreciation deduction on property that is not eligible for it is generally allowed, under Rev. Proc. 2011-14, to correct that over-depreciation by filing an automatic accounting method adjustment for any tax year subsequent to the tax year the property was placed in service. Under this procedure, the taxpayer would recognize the excessive deductions in taxable income over four tax years, through a section 481(a) adjustment. This automatic change procedure would generally apply in any tax year the taxpayer still owned the property at the beginning of the year.
Alternatively, the taxpayer could correct the over-depreciation by filing an amended tax return for the tax year of the over-depreciation. The amended return would need to be filed before the taxpayer files its tax return for the following tax year.
For more information, contact a tax professional with KPMG’s Washington National Tax:
Lynn Afeman, (202) 533-4092, firstname.lastname@example.org
David Culp, (202) 533-4104, email@example.com
Cathy Fitzpatrick, (202) 533-3168, firstname.lastname@example.org
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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
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